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BBBY earnings call for the period ending August 31, 2018.

Contents:

Prepared Remarks

Questions and Answers

Call Participants

Prepared Remarks:

Operator

Welcome to the Bed Bath & Beyond Fiscal 2018 second quarter earnings call. All participants will be in a listen-only mode until the Q&A portion of the call. Today's conference call is being recorded. A rebroadcast of this conference call will be available beginning on Wednesday, September 26th, 2018 at 8:00 p.m. Eastern time through 8:00 p.m. Eastern time on Friday, September 28th, 2018. To access the rebroadcast, you may dial 888-843-7419 with a passcode ID of 47547438.

At this time, I'd like to turn the conference over to Janet Barth, Vice President, Investor Relations. Please go ahead.

Janet Barth -- Vice President, Investor Relations

Thank you, Adrienne, and good afternoon, everyone. Before we begin, I want to remind you that our Fiscal 2018 second quarter earnings release and slide presentation can be found in the investor relations section of our website at www.bedbathandbeyond.com and as exhibits to a Form 8-K we filed just ahead of this call. Feel free to access these materials now while I continue with our introduction.

Let me remind you that this conference call and the slides we refer to may contain forward-looking statements, including statements about or references to our internal models and our long-term objectives. All such statements are subject to risks and uncertainties that could cause actual results to differ materially from what we say during the call today. Please refer to our most recent periodic SEC filings for more detail on these risks and uncertainties. The company undertakes no obligation to update or revise any forward-looking statements.

Here are some highlights from our second quarter results, which reflect our ongoing transformation and our continued focus on being trusted by our customers as the expert for the home and heartfelt life events. Our second quarter net sales were flat for the prior year and comparable sales declined approximately 0.6%, including strong sales from our customer-facing digital channels and a mid-single-digit percentage decline in sales from our stores.

Net earnings per diluted share were $0.36, in line with our model. We continued to grow our cash and investments and ended the quarter with a balance of approximately $1.1 billion, about double the amount of cash investments we had at the end of the Fiscal 2017 second quarter. We have made adjustments to our Fiscal 2018 modeling assumptions to reflect a number of factors.

These include ongoing learnings from many of our initiatives as we transform our company, as well as the bias to prioritize long-term profitability improvement over near-term sales growth, the continuation of trends we've been experiencing, the impact from growth and enrollment in our BEYOND+ and College Savings Pass program, the gains from a recent building sale, fiscal back half management consulting fees, the estimated impact from both Hurricane Florence, and the imposition of tariffs on our imports from China.

We thoroughly estimate that our comparable sales for the full year will be relatively flat to last year and that our net earnings per diluted share will be at the low end of our previously modeled range of about $2.00. In connection with our Vision 2020 financial goals, while we have slightly modified the near-term comp sales goals, we remain on track to moderate the declines in operating profit and net earnings per diluted share this year and next and to grow our net earnings per diluted share in Fiscal 2020.

In addition, our Board of Directors today declared a quarterly dividend of $0.16 per share, payable on January 15th, 2019 to shareholders of record at the close of business on December 14th, 2018.

During our call today, Steven will discuss our progress in transforming our company. Sue will provide more detail on our roadmap for operational excellence and some of the cost savings measures across our company to drive better long-term performance, and Robyn will review our quarterly results, including our Fiscal 2018 modeling assumptions. We will then open up the call for questions.

I'll now turn the call over to Stephen.

Steven Temares -- Chief Executive Officer

Thank you, Janet. I would like to express that our thoughts and prayers continue to go to the millions of people, including our associates, their families, and our customers, who have been impacted by the devastating effects of Hurricane Florence.

In all, we had 63 stores immediately impacted by this storm, but through the extraordinary efforts of our associates, within eight days, all of them were back open and operating to serve our customers. Throughout this time, our main concern has been for the safety of those impacted and to provide assistance to our associates and those most affected.

Turning back to the quarter, our net earnings per diluted share were in line with our model and our net sales were slightly below our plan. We are investing in and managing the business with a focus on transforming our company and reestablishing earnings growth. Investments we are making and the different levers we are pulling across many areas of the organization are intended to drive long-term profitability, recognizing that these actions may negatively impact sales and profitability in the short-term.

Our transformation is taking root and the key driver of our ability to succeed is our people. We have chosen to work on many things at once in order to make it happen quicker. In order to do that, we continue to leverage our existing associate base and augment our talent with specialized new hires in order to effectively execute our long-term strategy.

Over the past 18 months, we have bolstered the strength of our existing team with individuals with strong expertise in areas including data analytics, supply chain, customer fulfillment, merchandising, life stages, e-commerce, portfolio management, and IT. In some areas, we have reorganized groups, stood up new teams and/or hired new leaders.

Among the changes are the introduction of our strategic portfolio management office and the hiring among others of chief officers for technology, value optimization, delivery experience, solutions, products, and digital operations. In addition, we have shifted some of our senior leaders into new roles and responsibilities to enable them to focus more fully on driving our transformation and achieving our long-range financial goals.

We have also teamed with two world-class management consulting firms with deep expertise in facilitating transformation to help our merchandising improvement, marketing personalization, and cost-savings initiatives, among others. As retail continues to be reshaped, we are undertaking and embracing significant change at a rapid pace while embedding best practices for continuous improvement all while running our day-to-day business.

There are no shortcuts for long-term success. We are making good progress across the key pillars of our long-term performance strategy, including assortment, services and experience, and engagement with an underlying foundation of operational excellence.

Today, I'd like to provide a brief update on some of the initiatives we've previously discussed and then provide insights on a few additional ones. Our efforts to strengthen our position as a leader in the college life stage, our focus on driving value optimization across our business, and our work to reduce costs and create efficiencies throughout our supply chain.

Then, Sue will provide more detail on our roadmap for operational excellence and some of the cost savings measures across our company to drive better long-term performance. And then Robyn will provide a financial overview, including our financial assumptions for the year. We will then open the call to questions.

Now, turning to our initiatives -- last quarter, we discussed decorative furnishings, our Next Generation store format for Bed Bath & Beyond, marketing personalization, and inventory optimization. We continue to progress on each of these and are pleased by the results. For those of you who have our slide presentation in front of you, you can turn the slide to the one entitled Strategic Initiatives.

I'll start with an update on decorative furnishings. Year to date through the end of the second quarter, we have added about 42,000 decorative furnishing SKUs, building a total assortment count increase of approximately 37% year over year. While we are increasing and enhancing our assortment offering, we will now also be refocusing our efforts and creating efficiencies and driving profitability in the category.

This includes a comprehensive review of our offering and its performance, elimination of some less profitable SKUs, and decisions based on how the profitability of each SKU is impacted by the relationship among initial price, use of dynamic pricing, and availability of couponing and free shipping.

As I mentioned earlier, some of these levers we can pull may have short-term implication on sales as they impact the assortment, but we believe are necessary for the long-term profitable growth of our business.

Sales of decorative furnishings within Bed Bath & Beyond and buybuy BABY in the United States and Canada have grown approximately 18% fiscal year to date. We are also seeing some promising trends in our in-store decorative furnishings pilot. Sales of the enhanced decorative furnishings offerings purchased in-store as well as decorative furnishings ordered in-store and shipped directly to the customer have grown in the mid-single-digit percentage range above non-pilot stores.

Looking at the web sales of decorative furnishings from within the geographic areas of the pilot stores, we have seen a slight increase in sales compared to non-pilot stores in those same markets. Moreover, given the nature of furniture purchases as a longer-term considered purchase, we expect sales in this category to increase as awareness of our position in the market matures.

We plan to expand the number of pilot stores from 78 to more than 100 stores by spring of 2019 and we also look forward to launching our initial in-hour brand during that time, which should better position our product differentiation and margin profile within the category.

In connection with our Next Generation stores, we remain on track to have a total of approximately 40 next generation stores by this upcoming spring. We currently have nine stores with the new format and plan another nine this fall. Iterating quickly but continuous improvement -- beyond these 40, we have identified the next 125 stores with the potential to become Next Generation stores.

There's a lot of work to do. These stores are a working lab and we embrace that there are many things that are not right. We will learn from them and evolve quickly. Still, with all of the things not right and with little marketing, we are seeing favorable trends in these stores. For the Next Gen stores that have been open for at least four weeks, sales and transactions year to date through the end of the second quarter increased approximately 4% and 3% respectively, compared to the same period last year, while our other brick and mortar stores across the chain are trending down in these metrics in the mid-single-digit percentage range.

With regard to marketing personalization, the team has launched over 50 tests to date. The agile structure of the team has sped up the time it takes to build and run a test and identify its effectiveness. You can determine and scale the winners more quickly to recognize incremental revenue. The team is continuing to launch tests in the range of about five every two weeks.

We're also investing in the technology and people to automate the most impactful tests. We are on track to deliver on our technology roadmap to support marketing personalization, which includes the implementation of a personalization decision engine and identity management infrastructure and a customer data platform, among others, to leverage our own data as well as other relevant third-party data to develop and scale these tailored and personalized marketing communications.

As far as our progress on inventory optimization, we continued to implement the evolving inventory strategies including SKU rationalization, SKU space reduction, show more, carry less, and assisted store ordering. At the end of the second quarter, year over year inventory goes down approximately $100 million or about 6% where these strategies were put into place.

Now, turning to some of our other strategic initiatives, we will start with the slide entitled Campus Ready. Going away to college is an important life stage for our long customers and their parents. And over the years, we have expanded our product assortment and service offering in store, online, and on campus to become the destination for college shopping, offering a wide selection of products and great values, along with differentiated services with the objective to make the moving process more convenient and less stressful to students and their parents during this exciting time and introduce ourselves to and begin a relationship with these college-bound students.

As we said previously, there are several ways for us to measure our performance in back to college -- for example, the number of pack and hold orders created and fulfilled on the dollar value of these orders, the number of school partnerships established, the sales of the items we considered to be part of our back to college assortment, web traffic and web sales from our college pages, and offer redemptions.

In evaluating our back to college performance this year, while we had good strength across many of these metrics, we would conclude that our sales results were similar to our total company performance during the quarter. We will remain committed to making the investments necessarily to engage with the college customer and then leveraging analytics and marketing personalization to build our relationship with them over time.

To recap some of the new digital service we added this year to our back to college offering, complementing our popular in-store events and other services, including college registry, back and hold, and our comprehensive campus checklists, we introduced a new interactive checklist tool to assist students and their parents in developing and managing a tailored list of campus-ready items based on individual responses to a few simple questions. Through early September, tens of thousands of interactive checklists have been created.

We also expanded our social media efforts this year, including the creation of fun college shopping Snapchat filters, which garnered more than 6 million swipes to use a filter and resulted in more than 300,000 photos and/or videos taken with the filter during the period from June through August.

We have also evolved our College Savings Pass program. For a limited period of time, we offered registered students with a valid .edu email address access to our program, which included 20% discounts off entire purchases both in-store and online and free standard shipping for an entire year so students can benefit from the savings as they continue to settle into campus life. In addition to the coupon, participants benefit from the program by receiving information about our expansive products and service offerings in store, online, and on campus.

Although the College Savings Pass program was only available for a limited time, we experienced a five-fold increase in the number of program registrations this year. As I said, we look forward to further engaging with each customer and building upon our relationship with them, not only for the duration of the College Savings Pass by providing ideas and solutions to further maximize the comfort and functionality of their student housing, but also by leveraging analytics and marketing personalization to generate a lifetime customer.

Next, let's turn to the slide entitled Value Optimization. The immediate goal of this strategy is to deliver value to our customers and our company through strategic pricing decisions and seamless execution. We are building new tools and processes to identify opportunities to drive both revenue and profitability.

In partnership with many functional groups throughout the organization, the value optimization team is working to develop omnichannel pricing and promotions strategies, which will include refinement of dynamic pricing algorithms and online and in-store pricing philosophies and messaging.

We are utilizing new price optimization software tools that are enabling us to, among other things, deploy markdown strategies at a much more focused and local level than we were able to do before. In addition, based on preliminary results, expect the implementation of markdown optimization software and processes to accelerate sell through and profitability of our ever-changing fashion and seasonal assortments.

We're also in the process of replacing our current pricing execution platform with an internally developed system designed to give us greater flexibility to build and execute new pricing strategies more quickly and efficiently. Our goal is to accelerate the speed of cost and price changes for our buyers and store associates. This new tool should significantly reduce the time our buyers spend implementing price changes as we continue to work to free up our buyer's time to focus more on core merchandising activities, including assortment strategy in-store and online and developing meaningfully differentiated products within our assortments.

Through these efforts, we also remain focused on enhancing the customer experience. We have been introducing and communicating our new Price Match Promise, which clearly explains our committed to our customers to give them the best price, even when our own prices differ online versus in-store. Also, later this year, we'll be experimenting with the use of electronic shelf labels in a few Bed Bath & Beyond stores.

Turning to our next topic, the slide enabled Supply Chain Optimization. We have a number of projects under way targeting both speed and freight savings opportunities related to the transport of product to our stores. Our store supply chain network consists primarily of consolidation in cross-stock facilities and import facilities, which have, over the years, provided us great flexibility and significantly growing our store footprint across the United States and into Canada.

We recently employed new technology and a comprehensive supply chain network analysis, which identified a number of actions we could take to further optimize our current consolidation and cross-stock network. Based on the results of this analysis, we have identified several million dollars in annual freight savings that we can achieve over the next couple of years.

We've started to implement some of the recommended actions, including expanding use of our transportation management systems to increase the number of vendors and destination locations that we dynamically route, converting a portion of our order buy-ins to ship through our consolidated network, rather than shipping direct to store or through pull points and working with our suppliers on a host of transit time and freight cost reduction opportunities.

In addition to optimizing our store supply chain, we continue to enhance our e-commerce fulfillment network, where speed to customer is a significant priority. Back in April, we said we had plans to open an addition distribution facility. Over the summer, we signed a lease for a new 755,000-square foot distribution facility in Monroe, Ohio, which is part of the greater Cincinnati area.

We expect this new DC to open in the fall of 2019. Like our fulfillment center, located in Lewisville, Texas, this facility will operate not only as a fulfillment center for direct-to-customer shipments, but also as a cross-site facility for shipments to our retail stores servicing the greater Cincinnati and Northern Kentucky markets. When fully operational, we would expect this new DC to further advance our direct-to-customer deliver speed and deliver on our goal of being able to consistently execute on a delivery promise of click to home within two days.

There are two more brief updates I'd like to share with you today, the first one is regarding our BEYOND+ loyalty program and the second relates to some exciting news from One Kings Lane. If you could, please turn to the slide BEYOND+.

As we have previously described during these calls, our BEYOND+ loyalty program is designed to give our customers easy access to great benefits available at Bed Bath & Beyond, including 20% off entire purchase, free standard shipping with no minimum purchase, plus access to special offers and promotions throughout the year, all for an annual membership fee of $29.00. We plan to continue evolving the benefits of the BEYOND+ program as we learn more about what member customers value.

When we launched the beta program back in September 2016, initial enrollment was by invitation only, as we studied customer behavior and refined our offering. Since then, we have seen healthy growth in our enrollment and we believe we have around 1 million members at calendar year end. We have made it easy to enroll and use, including a tailored checkout experience within a customer's account. In addition, BEYOND+ offers are automatically applied in cart and at checkout -- no more searching for a coupon code.

Notwithstanding the short-term margin impact during this time of increasing enrollment, which Robyn will discuss shortly, the performance of our BEYOND+ remains strong and these members are among our most valuable customers, shopping 2.5 times more than our average customer and generating 4x higher revenue.

At this early stage, we are very encouraged by the long-term potential of this program. However, we still have a lot to learn about the behavior of these member customers to better understand both the short-term and long-term financial implication of the program and any modifications that we would like to make. As we continue to test and learn, we will also gain better insight into the lifetime value of our members and continue to enhance the features and benefits of our loyalty program.

I'll close my remarks with a preview of some exciting news from One Kings Lane. This fall, One Kings Lane will be launching an innovation in custom furniture with an exclusive offering of customized upholstery. This program is unique to the industry in its application of technology to make customizing furniture easier and more affordable than ever before. The combination of the ability to customize prints and patterns online, paired with accessible price points and short lead times makes this program a breakthrough in customized upholstery, making it available to anyone.

This launch is also an important step in the growth and evolution of One Kings Lane as it continues to evolve from its roots as a flash sale marketing to a decorating resource of everything our customers need to bring their personal style to life. Given the innovation nature of this program as potential appeal, it will also be accessible through and a foundational part of bedbathandbeyond.com as a co-branded experience as we continue to establish Bed Bath & Beyond's positioning and offering within the decorative furnishings category.

More details on the program and launch event will be made available over the next few weeks. I'll now turn the call over to Sue to give an update on our roadmap for operational excellence and some of the cost savings measures across our company to drive better long-term performance. Sue?

Susan Lattmann -- Chief Administrative Officer

Thank you, Steven. If you would like to turn to the slide titled Technology System Enhancements, I will start by giving an update on the major system deployments scheduled for Fiscal 2018. As we have previously discussed, this year, we will be delivering an unusually large number of foundation technology systems which will touch the vast majority of our associates or customers in some way or another. Earlier this year, we completed the upgrade of our enterprise order management system, which improves the order allocations to our stores and warehouses to increase speed of delivery to our customers and lowers cost.

During the second quarter, we have successfully completed the rollout of our new point of sale system to all of the Bed Bath & Beyond, buybuy BABY, and Harmon stores. The new POS will be deployed to the remaining concepts in 2019. This new system, which has associated-friendly touchscreen monitors will create a new foundation, allowing us to advance our future promotional activity, including the ability to collect customer email addresses at the point of sale and promote our co-branded credit card.

In addition, we completed the rollout of a human capital management system in the second quarter, which will allow us to be more efficient in onboarding, managing, and training our associates and for our stores to be more productive. This new system will allow us to automate work that was previously done manually. We can now expect online job applications, conduct video training and leverage more robust labor analytics.

We are also in the process of testing our improved customer-facing websites for Bed Bath & Beyond and buybuy BABY, which will be fully deployed in the second half of this year. This state-of-the-art architecture will enable us to deliver a faster and more intuitive digital experience to our customers.

Also, as Steven mentioned earlier, we deployed new technology tools to help with value optimization in the second quarter and we are on track to deliver on the technology roadmap to support our marketing personalization initiatives.

Furthermore, we will be able to cost-effectively support most of these capabilities going forward using our dedicated offshore technology office in India that we opened earlier this year. We are looking forward to leveraging these systems and capabilities to improve our profitability in 2020 and beyond.

I would now like to give an update on our cost-savings initiatives, focused on enhancing and creating efficiencies throughout our company. We believe a component of our transformation is cost control. Initiatives that we are working on in conjunction with our transformation encompass increasing our profitability, including optimizing our capital and organization structure.

There is nothing off-limits in this process and we are moving aggressively to enact the changes required by pursuing initiatives proposed from our internal subject matter experts, both seasoned veterans as well as those new to the company, in addition to expert advice from two world class management consulting firms with deep expertise and retail transformation.

Areas of focus, some of which we discussed earlier include increasing direct sourcing of our merchandise, optimizing our inventory levels across our stores and warehouses, reviewing our current store footprint in order to reduce occupancies or close stores to maximize profitability within a market, making our stores more efficient, leveraging our major systems deployments just discussed, and consolidating functions across concepts. As always, this process also includes a thorough review of our capital structure, including the appropriate level of capital expenditures.

As we have said, these changes are an important component of our plan to return to profitable growth in 2020 and will continue to update you on our progress on future calls. I will now turn the call over to Robyn to review our quarter results, including our Fiscal 2018 modeling assumptions. Robyn?

Robyn D'Elia -- Chief Financial Officer and Treasurer

Thank you, Sue. For those of you that are following along with the slides, I will now review our second quarter results. As a reminder, our Fiscal 2017 was a 53-week year, causing our Fiscal 2018 to start one calendar week later than Fiscal 2017. However, our comp sales metrics compare the same year over year calendar weeks. For your reference, specific date ranges related to our comp sales metrics are provided on the slide entitled Q2 2018 P&L summary.

Net sales in the quarter were approximately $2.9 billion, flat to the second quarter of last year. Comp sales for the quarter decreased approximately 60 basis points and reflected a decrease in the number of transactions in stores, partially offset by an increase in the average transaction amounts. On a directional basis, comp sales growth from our customer-facing digital channels continue to be strong in the quarter, while comp sales from our stores declined in the mid-single-digit percentage range.

Gross margin for the quarter was approximately 33.7% of net sales as compared to approximately 36.4% in the second quarter of last year. In order of magnitude, this decrease as a percentage of net sales was primarily due to an increase in coupon expense, a decrease in merchandise margin, and an increase in net direct-to-customer shipping expense.

The increase in coupon expense was a result in an increase of the average coupon amount, partially offset by a decrease in the number of redemptions. In addition, we are investing in the lifetime value of our customers through our annual BEYOND+ membership and our College Savings Pass programs. The richer benefits of these programs, including 20% off entire purchase and free shipping are realized immediately upon sale and have and will continue to have an impact on our gross margin during this period of increasing enrollment.

In addition, BEYOND+ membership is currently amortized over the one-year membership period. While we continue to evaluate these programs, we estimate their impact on our gross margin was approximately 40 basis points for the second quarter and 30 basis points for the first six months.

SG&A for the quarter was approximately 31% of net sales as compared to approximately 30.6% in the prior year period. In order of magnitude, this increase in SG&A as a percentage of net sales was primarily due to increases in technology-related expenses, including related depreciation, management consulting expenses related to our merchandising improvement, marketing personalization, and other initiatives, and advertising expense related to a continued shift to digital advertising.

Also contributing to an increase in SG&A is a non-recurring charge related to a real estate decision to right size certainly leased office space in New York City. All of these items were partially offset by a decrease in payroll and payroll-related expenses primarily due to the store management restructuring changes implemented in the prior year second quarter.

Our effective tax rate in the second quarter was approximately 24.3%, which benefited from the lower tax rate as a result of the Tax Act and included net after tax benefits of approximately $1.8 million due to distinct events occurring during the quarter. In the prior year period, our effective rate was approximately 37% and included approximately $1.5 million of net after tax benefits due to distinct events occurring in that quarter.

Considering all of this activity, net earnings per diluted share were $0.36 for the quarter, in line with our model. As we noted on our prior call, when comparing to the prior year, our estimated 2018 quarterly EPS as a percent to the total year was anticipated to be lighter in the second and third quarters and stronger in the fourth quarter.

Now, looking to our balance sheet, we ended the quarter with approximately $1.1 billion in cash and investments, an increase of $535 million, which is about double the amount of cash and investments we had at the end of the Fiscal 2017 second quarter. We also ended the quarter with retail inventories of approximately $2.8 billion at cost, which represents a reduction of about 1.7% compared to the end of the second quarter last year.

We continue to focus on inventory optimization strategies and where they have been more fully implemented, we experienced a reduction of approximately $100 million or about 6% in inventory, which was partially offset on a company wide basis due to accelerated timing of receipts involving holiday and other opportunistic buys.

Our retail inventory is continued to be tailored to meet the anticipated demands of our customers and are in good condition. We remain on track to reduce our year-over-year inventory by approximately $150 million or about 5% at the end of the fiscal year. Capital expenditures for the first six months of 2018 were approximately $182 million, with about 70% related to technology projects, including investments in our digital capabilities and the development and deployment of new systems and equipment in our stores, some of which Sue discussed earlier.

The remaining CapEx was primarily related to our new store openings and investments in existing stores. Share repurchases under our current $2.5 billion share repurchase program were approximately $41 million in the quarter, representing about 2.1 million shares, and the program has a remaining balance of approximately $1.4 billion at the end of the quarter. In addition, our board of directors today declared a quarterly dividend of $0.16 per share to be paid on January 15th, 2019 to shareholders of record as of December 14th, 2018.

Now, let's turn to our outlook. We continue to remain focused on our goals of moderating the declines in our operating margin and net earnings per diluted share for the next two years and growing our net earnings per diluted share in 2020. As we progress through this transformation, we continue to implement new learnings to position us to achieve our goals. While we are learning, we are evolving our roadmap as we work to derive better long-term profitability.

As we have described, this may negatively impact sales and profitability in the short-term. We began implementing some of these learnings this quarter and will implement more throughout the remainder of this year and into next. They include changes such as offering online product recommendations based on both item popularity and margin, eliminating less profitable SKUs from our assortment, bundling items, evaluating an increase of our free shipping threshold, reviewing coupon exclusions, and optimizing our advertising spend.

Considering these changes, as well as the bias to prioritize long-term profitability improvement over near-term sales growth, the continuation of trends we've been experiencing, namely strong growth and our customer-facing digital channels, and continue softness and transactions and stores, the impact from growth and enrollment in our BEYOND+ and College Savings Pass programs, the gain from our recent building sale in the third quarter, the fiscal back half management consulting fees, the estimated impacts from Hurricane Florence in the third quarter, and the imposition of tariffs on our imports from China, we are slightly reducing our sales model and modeling full-year net earnings per diluted share to be at the low end of our previously modeled range of about $2.00.

The following are our planning assumptions for 2018. Consolidated net sales, which include one less week of sales compared to 2017 are modeled to be down slightly. As a result of the impact of the fiscal calendar shift resulting from the 53rd week in the prior year, we are modeling net sales for the third quarter to increase in the mid-single-digit percentage range and net sales for the fourth quarter to decrease in the high single-digit percentage range, resulting from the calendar shift and the loss of the 53rd week.

Comparable sales to be relatively flat, including continued strong growth in our customer-facing digital channels, gross margin de-leverage, primarily due to our continued investment in our customer value proposition, including the impact from BEYOND+ and College Savings Pass programs and the ongoing shift to our digital channels, SG&A deleverage, primarily due to the investments we are making to transform the company, operating margin deleverage to be less than we experienced in 2017.

Depreciation expense to be in the range of approximately $320 million to $330 million, and estimated full-year tax rate in the 25% to 26% range, capital expenditures in the range of approximately $375 million to $425 million, subject to the timing and composition of projects, the opening of approximately 20 new stores, with the majority being buybuy BABY and Cost Plus World Market stores, the closing of approximately 40 stores, with the majority Bed Bath & Beyond stores unless we are able to negotiate more favorable lease terms with our landlords.

Continued growth of our cash and investments even after funding our operations and capital expenditures, as well as our quarterly dividends and share repurchases. As a reminder, our share repurchased program may be influenced by several factors, including business and market conditions. All of this considered, we are modeling net earnings per diluted share to be at the low end of our previously modeled range of about $2.00, with the balance of the net earnings per diluted share to be split roughly 15% in the third quarter and roughly 85% in the fourth quarter.

This considers the shift of one holiday week out of the fourth quarter and into the third quarter, the loss of the 53rd week in the fourth quarter, and the impact of the new revenue recognition standard, which for us, will shift advertising expenses from the fourth quarter to the third quarter. Lastly, looking to the back half of this year and beyond, as Sue said, we understand that as we transform our company, our cost structure must continue to change to ensure that we can grow our profitability in line with our financial plan through 2020. We are actively engaged in this process.

Before opening the call to questions, please note that our next quarterly conference call will take place on Wednesday, January 9th, 2019. At that time, we will review our third quarter results and provide an update on the remainder of Fiscal 2018. We can now open the call to questions.

Questions and Answers:

Operator

Thank you. We'll now begin the question and answer session. If you have questions, please press * then 1 on your touchstone phone. If you wish to be removed form the queue, please press the # sign or the hash key. If you're using speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have an audio question, please press * then 1 on your touchstone phone.

And our first question comes from Greg Melich from MoffettNathanson. Please go ahead.

Greg Melich-- MoffettNathanson -- Analyst

Great. Thanks. I have two questions. One is in terms of trying to understand the online growth and really how multi-channel is working, it seems like online now or digital is up to maybe 10% of sales. How many of the sales in the store do you think customers are actually looking at the website first before they interact with Bed Bath & Beyond overall? Thanks.

Robyn D'Elia -- Chief Financial Officer and Treasurer

Our online growth -- we continue to experience growth in our customer-facing digital channel. We've been reporting that for many quarters. Your assumption, I think we've said historically may be a little light in terms of what your expectation is. In terms of being able to determine if customers start in the store and then switch over to online growth, it's difficult for us to pinpoint the exact origination of where customers are thinking about the order, which is why we look at on a holistic basis as an omnichannel retailer.

Greg Melich-- MoffettNathanson -- Analyst

Just to make sure I got that right, the 10% might be a little light and it might actually be more of your sales now, but that maybe less than half of people that shopped Bed Bath have actually looked first online, is that fair?

Robyn D'Elia -- Chief Financial Officer and Treasurer

I can't answer the latter question. But yes, the first part, yes.

Greg Melich-- MoffettNathanson -- Analyst

Sure. Then a follow-up on financials, it looks like payables increased quite a bit. Was just a timing of when the quarter ended or was there something there -- what drove that in the quarter and how should we expect that to play out through your end? Thanks.

Robyn D'Elia -- Chief Financial Officer and Treasurer

No, it's just a timing issue.

Operator

And your next question comes from Michael Lasser from UBS. Please go ahead. Your line is open.

Michael Lasser-- UBS -- Analyst

Good evening. Thanks a lot for taking my question. We saw an acceleration in the degradation of your gross margin this quarter. It would be very helpful to articulate why that was so we can understand how it's going to get better from here, presumably based on all the remediation factors you mentioned, we're seeing your gross margin through your online channels degrade and a big shift to that along with less traffic in stores has caused your pressure, but I think it would be very helpful if you more clearly laid that out.

Robyn D'Elia -- Chief Financial Officer and Treasurer

Sure. The main drivers for gross margin this quarter were the increase in coupons, decrease in merchandise margins, and an increase in our net direct-to-customer shipping expense. Part of what's included -- I'm sorry?

Michael Lasser-- UBS -- Analyst

Those are factors that you've been citing for a long time. It doesn't give a sense for why it's stepping down so much. It's the most significant gross margin erosion that you've reported in quite some time.

Robyn D'Elia -- Chief Financial Officer and Treasurer

So, we are calling out merchandise margin as the second contributor. Part of what is considered in there along with the cost of merchandise, markdowns is mix shift -- so, the shift to digital as well as mix in categories.

Steven Temares -- Chief Executive Officer

And also, part of the coupon increase was due to our investment in the BEYOND+ program. I believe that was around 40 basis points for this quarter.

Robyn D'Elia -- Chief Financial Officer and Treasurer

Yes, 40. The outlook for the year, we are calling out that the operating margin will continue to deleverage but at a lesser rate than we experienced last year.

Michael Lasser-- UBS -- Analyst

And if we think about your plan from here, you're making investments upfront to presumably drive traffic down the road or better comps down the road. How does that play out? You're not seeing the return on those investments right now. What's going to change in order to drive a better outcome down the road?

Steven Temares -- Chief Executive Officer

I can start and everybody can chime in. A lot of the initiatives we're working on should be able to help several of those items. For example, we talked about the value optimization initiative, which will have an impact on gross margin, also optimizing inventory levels. We're also looking at direct sourcing, which will help margins down the road.

Then within SG&A, we're looking at leveraging our leads or system deployments and consolidating functions across systems, really looking across the entire company for synergies to be able to increase our profitability going forward. I know we've discussed some on the call. We're happy to discuss more tonight.

Operator

And our next question comes from Jonathan Matuszewski from Jefferies. Please go ahead.

Jonathan Matuszewski-- Jefferies -- Analyst

Yeah, thanks for taking my questions. The first one is just on store remodels. It looks like the Next Generation store formats have actually been showing some encouraging trends for sales and transactions. It looks like you've identified more to come in the future. What would make you rethink the pace of remodels here toward accelerating them? Thanks.

Steven Temares -- Chief Executive Officer

Well, one of the elements is going to be profitability. So, the other is how quickly do we feel as if that holistically the store is being put together in a way that we wanted to roll it back. The way we're going today is we're iterating very quickly in the stores, but getting a department, multiple departments, merchandising thought process or part of being expressed in the stores because as we learned, we're putting it into the stores, but the next store might be the 20th store or the 25th store and that all coming together.

So, the elements of getting a store right in totality and rolling it back remains to be seen, but the thing is that the things that we're learning as we move forward, elements of it are things that we're able to implement and change practices, how we're buying, how departments are set up, nexus of product.

But again, all those things we could do and impact the existing stores, but the idea of whether we're going to go back and redo and what rate we're going to redo those stores really depends upon at what point we feel as if holistically the stores have the look and feel we want and the profitability is there. That makes sense because the return on investment is there. Taking a store and converting a store in its entirety is a significant cost because of the markdowns to be done right as we do the flooring, the lighting, the adjacency of departments, all those things will be a major, major expenditure in a story.

So, again, as we move forward, we'll see as far as how we get it, how far it becomes desirable to do that and how quickly. Again, we have these working labs, they're moving very quickly. We're learning a lot and we're taking wins out of them that we are able to apply to the existing chain.

Jonathan Matuszewski-- Jefferies -- Analyst

Great. Then just a quick follow-up on the BEYOND+ program -- it looks like some nice shopping frequency and overall spend for the members. Can you put that into historical context for us? Has that been scaling since the initiation of the program?

Steven Temares -- Chief Executive Officer

Yeah. Again, I think it was December '16?

Gene Castagna -- President and Chief Operating Officer

September.

Steven Temares -- Chief Executive Officer

September '16. It's really just when we're just taking the beta off the program. We really haven't shouted out the program. We haven't done a lot of marketing around it. Early on, we were trying to understand -- and we didn't have a lot of elements even from a technology perspective built in, like auto-renewing our customers. There were reasons not to grow so fast. Then again, we needed to understand what the lifetime value of the customer was and what they're buying. Are they buying low margin, low average unit items? Are they doing things that end up aggregating to $29.00 free shipping or it is free shipping? What does this look like over time?

So, I think probably this past year, we started to ramp up and make it more available. I think that we'll be probably approaching around a million customers at the end of the year. So, there's a good base now to understand. But again, time really will tell about the overall profitability and the tweaks we need to make in the program, and not only the tweaks we need to make in the program, but what should the program be in terms of other things other than a discount in free shipping.

And again, that's a learning also -- what do the customers want? What are they buying? Is it mostly decorative furnishings? Do we want to take them to a different place because of that? All those things will be learned over time. So, it's been pretty much a gradual ramping up from September '16 through '17, then the pace hastened a little bit as word of mouth spread about it over this past year, but ultimately, the decision to really turn on the marketing is one that has not been made yet.

Operator

And your next question comes from Simeon Gutman from Morgan Stanley. Your line is open.

Josh Kimboj-- Morgan Stanley -- Analyst

Hi, this Josh Kamboj on for Simeon Gutman. After several quarters of not really seeing gross profit improvement, it appears that the value proposition is not really gaining traction yet. Have you considered being more of a price leader in any of your categories or just across the business in general? If you have, can you please just share some key learnings?

Steven Temares -- Chief Executive Officer

Again, first of all, we believe that being priced right is critically important. When we talk about being a price leader, really, it depends on the category of merchandise that we're looking at. We have to really view ourselves as destinational and we have to be at the right price, obviously, and be effectively a leader at that because of that. There are items and categories that are more impulse and the margin opportunity exists in those categories differently than they would coming on the destinational end.

So, all those things play a role in it. We're building out the very talented value optimization team. We crawl the web and look at all competitors and being at the right price even absent the coupon is critically important to us. So, again, it does to some degree depend upon the category, but generally speaking, that's not something that we accept being wrong on. It's not as if we don't view ourselves as a leader today.

Josh Kimboj-- Morgan Stanley -- Analyst

Okay. Thank you.

Operator

And our next question comes from Steve Flores from Guggenheim. Please go ahead. Your line is open.

Steve Forbes-- Guggenheim Partners -- Analyst

Good afternoon. Maybe going back to the BEYOND+ membership program -- you mentioned a million members by year end. Maybe just baseline that for us. How does that compare to your original expectation at the beginning of the year, the pace of the sign-ups, even though you lacked maybe the marketing focus.

Then how are these individuals signing up? Is it mostly at the stores in conjunction with a large purchase that makes the value proposition of the $29.00 just an easy decision or is it ramping in online? Are you seeing repeat purchases? Just really any color that would give greater conviction that the program's value proposition is resonating.

Steven Temares -- Chief Executive Officer

Again, there are so many variables to look at when we analyze it. I think the numbers I believe are in the mid-single digits of people that are registering in-store and the value is greater than the $29.00 they're paying. So, they're purchased in excess of $150.00, I guess. So, it's, again, not a high percentage. There are all technical issues, even with that because when somebody does it online, the loading of the coupon to transact, I think it's taking on average five minutes to load, which of course is unacceptable as well and that will be changing shortly.

So, it's either been difficult to do it in store, but in store is a critical place that people are doing it and recognizing the value and then online would be the second place, I think, in order of where people are signing on to the program today. That's the way it's trending today. And as far as the expectations, we're aware of what other people do and the numbers they report in their loyalty programs, and we have a very strong loyalty program at world market, but they all have different variables about them, whether they're paid or not paid, but if the benefits -- again, it was hard to really assess where we expected to be.

But we're pleased, we view the numbers, really without marketing it to any degree or any significant degree are good numbers and numbers that allow us to really understand the customer base, to get a good cross-section, and to really evaluate what they're doing and to understand the lifetime value of that customer as we move forward.

Steve Forbes-- Guggenheim Partners -- Analyst

And then just a follow-up -- I believe you mentioned two-day shipping when you discussed the supply chain strategy and the supply chain initiative in the presentation. So, what's the current thought process on the free shipping option that exists as part of the membership program because I think it's standard shipping? Do you envision moving that to a two-day shipping offering to meet expectations at some point in time as you work your way through this investment cycle, sort of a vision to 2020?

Steven Temares -- Chief Executive Officer

Yeah, an important part of getting to the two-day shipping is the facility that we're opening up in the Cincinnati area next year.

Susan Lattmann -- Chief Administrative Officer

Yeah, fall of '19.

Steven Temares -- Chief Executive Officer

All the components for the BEYOND+ program are under review and we're trying to understand what the customers feel is the most important part of the program and what tweaks we can make to make it more profitable over time and also more compelling for the customers over time. So, that will be considered one of the components. So, when we open up that facility next year, it will be more difficult to achieve that. Based on where our current facilities are, it will take us a long way to get to the majority of the population in two days.

I guess I have a couple of questions. I know you gave us the gross sales numbers that you expect for the third and fourth quarter. You do say comps are flat for the full year. Can you kind of parse out third and fourth quarter from a comp perspective? To get there, you're at a negative $0.06 for the first half.

Robyn D'Elia -- Chief Financial Officer and Treasurer

Yes. We didn't provide that specific detail, but knowing that we have to get to relatively flat, we thought it was more helpful to provide the net sales variation because of the calendar shift.

Budd Bugatch -- Raymond James -- Analyst

Well, I understand that. We understand there will be a week where you don't have a comp. I respectfully take issue with what you thought would be more helpful. Also, you've now got so many brands and a number of different websites and yet, all we ever see is a totally aggregated number for the company. Can you give us a flavor of the business in places like buybuy BABY and Cost Plus World Market and some of the other businesses? I suspect you won't give us any quantification, although don't let me stop you if you decide you want to.

Steven Temares -- Chief Executive Officer

The vast majority of the sales online come from buybuy BABY and Bed Bath & Beyond. The other concepts are a small component of the overall online sales. If you're asking, Budd, obviously, BABY has been performing well. We've benefited from the Babies R' Us closings. We're seeing generally similar trends across the concepts in bricks and mortar versus what we're experiencing online.

Operator

And our next question comes from Matt Fassler from Goldman Sachs.

Matt Fassler-- Goldman Sachs -- Managing Director

Thanks a lot and good evening. Two questions -- first of all, on tariffs, you're one of the first companies to report earnings subsequent to the actual implementation of this latest round of $200 billion and one of the first, to cite some perspective, impact to earnings from it. So, can you talk about how this actually impacts earnings in the business? If not in the short run -- you did speak to it for the remainder of this fiscal year -- then for the long run. What realistic mitigation opportunities do you have here?

Robyn D'Elia -- Chief Financial Officer and Treasurer

So, regarding tariffs, everything we know today about the impact on our business we built into the back half. For us, our direct imports from China represent a relatively small number of our business and we're continuing to learn things through our domestic vendors and will continue to learn about that into the future. We're considering all of our options in terms of mitigation strategies. But again, it's all built into the model that we provided.

Steven Temares -- Chief Executive Officer

Again, it's a little bit of a black hole. We're working it very aggressively and we'll have to see. It's not dissimilar. I think as Robyn said, direct from China is lower, but our vendors are bringing in a lot of products from China. So, again, they've had the benefits of currency for a period of time and we have third parties that are involved in some of these transactions. So, there's a lot to be discussed and negotiated. So, all these things are being worked on. So, it's really hard to quantify at this point. So, we've done our best and built it into the model.

Matt Fassler-- Goldman Sachs -- Managing Director

Then on BEYOND+, kind of a two-part question. I'll state them both upfront -- number one, do you have a sense, I know it's hard initially -- obviously, the sales per member are stronger than other customers -- is this a self-selecting group that was already a very strong Bed Bath customer? Then relatedly, you had a question before on pricing and value proposition.

I know for some customers when they're on the site, they can see the BEYOND+ price and this is a price that is most often below the competition based on our observation and contrast to the list price that you might show, the standard price that X-coupon might be higher, might be lower. Does that price and the evidence value proposition have an impact on conversion when the customer sees those prices? Thanks so much.

Steven Temares -- Chief Executive Officer

Yeah. First of all, we're not sure necessarily what's inducing them to sign up for the program. What we're seeing is the return engagement is significant. Even if that was an inducement, it seems to be getting into the funnel. As far as how we selected initially when we started the beta program, we really tried to go out to a cross-section to get a representative sampling of all of our customers when we marketed the program and tried to get a cross-section and representative sample back as BEYOND+ customers.

I think since then, we've migrated away from that as people have signed up. Again, who's signing up on a go-forward basis, that might be self-selecting to some degree, but initially, we made the attempt to get that cross-section.

Operator

And your next question comes from Zach Fadem from Wells Fargo. Your line is open.

Eric Cohen -- Wells Fargo -- Analyst

Hi, this is Eric Cohen on for Zach. Your prior guidance called for benefit from the Toys R' Us store closings. I'm just wondering if you can provide any benefit you might have seen in this quarter and how compared to your expectations in your outlook for the rest of the year?

Steven Temares -- Chief Executive Officer

The benefits that we see from buybuy BABY, we are pleased with how that's performing -- or from baby sales, I should say, we're pleased with how that's performing -- have been incorporated into our actual results as well as incorporated into the model. For the remainder of the year and the outlook, we did say that our net sales will be down slightly and comp sales will be relatively flat.

Eric Cohen -- Wells Fargo -- Analyst

Okay. Just touching on the BEYOND+ program, just comment on how many members you have right now and to get to one million. You also mentioned it was a 30-basis point headwind this quarter. Just help us size how big of a headwind it could be in the back half as enrollment accelerates.

Steven Temares -- Chief Executive Officer

I don't think we disclosed how many people we have today. We do have a pretty consistent weekly sign up. If that continues from where we are today, we think we'll have a million toward the end of the year.

Robyn D'Elia -- Chief Financial Officer and Treasurer

That's correct.

Steven Temares -- Chief Executive Officer

And the second part of the question?

Robyn D'Elia -- Chief Financial Officer and Treasurer

It will continue to impact the margins as we're in this increasing period of enrollment.

Operator

And your next question is from Chris Horvers from JP Morgan. Please go ahead.

Tami Zakaria -- JP Morgan -- Analyst

Hi, this is Tami Zakaria on for Chris Horvers. Thanks for taking our question. So, our first question is if you look at the home furnishings category growth in the second quarter, if you contrast that to your comp, which categories do you see are doing better relative to market and which categories are you seeing underperforming?

Steven Temares -- Chief Executive Officer

Again, as we told you, decorative furnishings, for example, an area that's been strong-growing -- I think the number is about 18% year to date and it's an area of focus for us, so we really try to communicate to the customers that we stand for all home as we grow this category online and trying to grow its presence in the stores. It's been strong for us. Obviously, the baby categories have been good for us as we become the destinational place to shop for baby products. So, that's been strong for us.

Again, it's really a -- the consistency we're seeing across the category and this degradation of store traffic, I would say, is probably fairly consistent across the stores.

Tami Zakaria -- JP Morgan -- Analyst

Got it. Thank you. So, the one follow-up we have is your online growth trending similar to last year or have you seen an acceleration based on the initiatives that you've taken?

Robyn D'Elia -- Chief Financial Officer and Treasurer

We continue to see strong growth in our customer-facing digital channels.

Tami Zakaria -- JP Morgan -- Analyst

Got it. Thank you.

Steven Temares -- Chief Executive Officer

And as we said on the call and were speaking earlier, the opportunity to really turn the dial that we've been having great growth for a good period of time now and the opportunity to really -- with a bias toward creating profitability and taking a look at that and making sure within the decorative furnishings area but with the digital business overall that we really look to manage that profitability as we move forward.

Operator

And your next question comes from Mike Baker with Deutsche Bank. Your line is open.

Make Baker -- Deutsche Bank -- Analyst

Just a real quick question because it's getting late -- the consumer environment is good. Your business isn't necessarily getting better. Are you seeing increased competition in the home furnishings space? We know it's competitive. But in your view, as you see, is it getting even worse?

Steven Temares -- Chief Executive Officer

Listen, we live with these numbers and we're not happy with them, but the notion that our business isn't getting better, there is a huge investment that we're making to make this business better to come out the other side of it. If you look at this organization and the people we have, the mission that we're acting on and the initiatives we have to accomplish it, we are a significant stronger company today than we were a year ago and significantly stronger than we were two years ago.

Again, we understand that a lot of these things, like the investments we're making in College Savings Pass or BEYOND+, there's pain today, the things that we're making in value optimization -- we look at all the investments we're making. We would like it to change our numbers immediately, but as we explained, we're looking at 2020. Even the things that we're learning today that we're turning the dials on maybe not to have strong sales today to drive profitability to ensure that when we go out the other side we're growing our profitability.

We're laser-focused on it. Again, I can't tell you that there's no one more disappointed that these are the numbers, but these numbers don't reflect that we're not as good a company. We're a better company today truly than we've ever been. It will be reflected in the numbers as we go forward, but it's going to be a time period which we've given.

Now, we're looking at moderating this decline over the next period of time and then growing our earnings. I know that's not popular. But again, as we've said before, there are no shortcuts to greatness. And again, we've been there, we understand it, we couldn't work harder on it, and we couldn't have better people than we have today doing it. So, again, we share frustration. But again, I don't share the conclusion of we're not a better company. I would share the conclusion that the numbers aren't acceptable.

Make Baker -- Deutsche Bank -- Analyst

Okay. Can I follow-up on that? Maybe this is minutiae -- you have guided down 2018. You kept the same language for 2019 and 2020, but it's off of a lower base now. So, in other words, if we had a number for 2020 prior to this, which if we followed your guidance would have been down in '18, down in '19, up in '20, did all three years come down if you follow what I'm asking or has 2018 come down but that 2020 number? Do you still have the same confidence in earnings power for that year that you had prior to this quarter?

Steven Temares -- Chief Executive Officer

Yeah. The earnings that we had for the quarter were in line with the expectations we had for our model. As we look out for this year, a number of things, including some learnings in how we're addressing initiatives with the impact from BEYOND+ and the College Savings Pass program, the backhand management fees, the Hurricane Florence, the imposition of the tariffs. What we're saying is now we believe we'll be in the low end of our model but in the model. So, again, we're in line with the model. We're going to believe we're going to remain in our model. That's not a change, from our perspective, in terms of our earnings.

Make Baker -- Deutsche Bank -- Analyst

Okay. Fair enough. I appreciate the color.

Steven Temares -- Chief Executive Officer

Thank you.

Operator

And your next question comes from Anthony Chukumba from Loop Capital Markets.

Anthony Chukumba-- Loop Capital Markets -- Analyst

Thanks for taking my question. I just had a question -- if I recall correctly, one of the things you were going to test in the concept stores was adding more value-priced treasure hunt merchandise. I just wanted to see if you could give any update or learnings on that particular initiative. Thank you.

Steven Temares -- Chief Executive Officer

Sure. When we talk about the Next Generation stores, there are a number of factors in them. But as you mentioned, something we call treasure hunt, which is a lot of the seasonal products, decorative furnishings that are in and out, scarcity product and then there's also -- we've turned hot spots in the store in deep value product. So, all in all, we see good signs of life, of course, in both of those categories, I would say, if you want to call them categories. It differs from store to store.

We do feel like when we talk about the hot spots and deep value that there's work to be done. The quality of the product we're looking to do and the buying for it really needed to be done further in advance and we can do better. I think overall in the Next Generation stores, if a chain is operating at a mid-single-digit comp negative and those stores are up 3% or 4% and that range from transactions and sales, it indicates that a lot of the things we're doing are taking hold.

I'm going to say it like I said before -- we are not happy with what they look like, not because the people aren't great who are doing it and not because we're not working hard enough, but because we decided to create labs. These stores are out there and they are imperfect in many ways and they are very iterative in the changes we're making to get feedback, to see something, to work quickly, and literally to fail fast. That's what we're doing here.

Again, there are great signs of life in each of the aspects of it. The two that you mentioned, they are, but not that we're happy that we're anywhere near optimizing what they could be.

Anthony Chukumba-- Loop Capital Markets -- Analyst

That's helpful. Thank you.

Operator

And your next question comes from Curtis Nagle from Bank of America. Please go ahead.

Curtis Nagle-- Bank of America -- Analyst

Good evening. Thanks for taking my questions. The first one is given the rising leverage and the results to date, when do you guys start thinking about preserving more capital and perhaps limiting the buybacks so numbers truly do start to stabilize?

Robyn D'Elia -- Chief Financial Officer and Treasurer

Well, we ended this quarter with $1.1 billion in cash, just to point that out. Our capital allocation really is a strategy that we discuss with our board in terms of where we should invest, how much cash to hold, what should we return in terms of dividends and share repurchases.

Steven Temares -- Chief Executive Officer

What is the number? $300 million comes due in 2024?

Robyn D'Elia -- Chief Financial Officer and Treasurer

Yeah.

Steven Temares -- Chief Executive Officer

The buyback numbers year to date are how many dollars?

Curtis Nagle-- Bank of America -- Analyst

Respectfully, you are at least including the debt on a negative net cash position. It sounded like at least some portion of the cashflow for this quarter, including '18, I'm guessing all the other assets were first out.

Steven Temares -- Chief Executive Officer

Curtis, with all do respect, we've said and stated that the objective is to build cash. So, if you go back in time, we've said that. We've accomplished that each and every quarter. This is not unique to that. So, we agree with you 100 percent and capital preservation is critically important to execute our game plan and we've been very successful in doing that.

We also agree with you and the board to take a good look to make sure that we understand capital allocation, to make sure we understand what we're doing with our buyback, and looking at the debt that comes due. So, in all those things we're looking at, the only thing we're pointing out again is the real dollars around it. So, again, if the number is -- what did you say the number was in the buyback?

Robyn D'Elia -- Chief Financial Officer and Treasurer

$63 million.

Steven Temares -- Chief Executive Officer

$63 million. So, again, we went from $500 million to $1 billion at the end of this quarter and we're talking about $6 million year to date in the buyback. So, we agree in principle with you. We're aligned. But again, just maybe how we interpret it is not consistent with how you're voicing it.

Curtis Nagle-- Bank of America -- Analyst

Okay. That's fair enough. As a follow-up -- at least relative to the prior quarter, I don't think there were any changes in terms of what you guys were doing or are going to do with real estate. I guess could you gives an update in terms of how the negotiations are going? Anything new to say given it is close to calendar year-end?

Steven Temares -- Chief Executive Officer

Yeah. I think you stated it well. It's close to calendar year-end. I think those are scheduled for the end of January closing date. The deals were going to be created and landlords were going to step up. They really needed to do so at this point. It gets late in the day. Our planning for closing stores requires notifying our people, stop ordering for the store, preparation for closing the store. So, if we haven't concluded a deal real shortly it becomes too late.

Operator

And our next question comes from Seth Basham from Wedbush Securities. Your line is open. Seth, your line is open.

Seth Basham-- Wedbush Securities -- Analyst

Thanks and good evening. My question is around gross margin guidance. When you look at the guidance for this year, you're expecting deleverage. Are you expecting more deleverage than last year?

Robyn D'Elia -- Chief Financial Officer and Treasurer

Our guidance did call for a continued deleverage in gross margin, but our operating margin will have deleverage than we experienced in the prior year.

Seth Basham-- Wedbush Securities -- Analyst

Okay. So, not necessarily as it relates to gross margins. Fair enough. As we think about gross margins this quarter in particular and look at the impact of couponing on the year over year change in gross margins, excluding the impact of BEYOND+ and campus loyalty programs, what drove an increase in pressure from couponing in gross margin this quarter relative to last quarter if that's correct?

Robyn D'Elia -- Chief Financial Officer and Treasurer

Well, we have been providing some different coupon offers throughout the quarter. Some of those may have been richer offers which also contributed to increased coupon expense.

Seth Basham-- Wedbush Securities -- Analyst

As you look forward to the balance of the year, would you expect that type of pressure to persist or are there other things you're going to change around?

Robyn D'Elia -- Chief Financial Officer and Treasurer

In terms of gross margin, we are continuing to say that it will deleverage. We are continuing to ramp up enrollment in the BEYOND+ program. We do believe that coupons are an important value proposition for our customers.

Operator

And your next question comes from Peter Benedict from Baird. Please go ahead. Your line is open.

Peter Benedict-- Robert W. Baird -- Managing Director

Okay, guys. Just quickly, a comment on the registry business -- can you give a sense of maybe how that is trending in the store and how that fits into the strategic stuff that you guys are working on? That's my first question.

Steven Temares -- Chief Executive Officer

It's a critical shopping mission for us. Both the bride and groom shopping and registering and the gift giving that results form a registry are critically important, plus as a life stage, getting to know that customer, introducing that customer and understanding them, the ability to then use analytics and personalization to take that customer, whether they're buying a home or an apartment and furnishing and as they move through their life stages, hopefully maybe some of them have a baby and have the largest baby company today and baby registry. So, it becomes critically important to us. Again, it's an important mission for us and an important customer.

Peter Benedict-- Robert W. Baird -- Managing Director

Thanks, Steven. Then would you guys be willing to size the Florence and the consulting fee impact? Those are seemingly one-time events that won't occur next year, at least hopefully not with respect to Florence. Can you guys give us a sense of maybe how material that is in 3Q?

Robyn D'Elia -- Chief Financial Officer and Treasurer

We built everything into the model. We wanted to list out all the component pieces that we had considered.

Steven Temares -- Chief Executive Officer

But I guess the other thing is -- what were you going to say, Sue?

Susan Lattmann -- Chief Administrative Officer

I think it was 63 stores or so.

Steven Temares -- Chief Executive Officer

Yeah. They were all open within eight days. So, again, reasonable impact, but thank goodness not anything of tremendous significance. Is that the number, 63-65 stores? Again, within eight days, they were all open. Okay. So, it hurt us, but it wasn't that significant. As far as the consultant, again, the consulting fees, that's not something we've broken out before, but again, we have many projects that we're working on as a company, major initiatives. One thing that we talked about earlier is that we've decided to go wide and we decided to try to do many things at once in the company and we've added great talent that allows us to do that.

The repercussions of that are really that it's more painful in the short-term and the other repercussion is that we come out the other side quicker because of it. So, again, a part of those initiatives are really driven by or facilitated by consultants.

Operator

And our next question comes from Cristina Fernandez from the Telsey Advisory Group. Please go ahead.

Cristina Fernandez-- Telsey Advisory Group -- Managing Director

Hi, I just had one question. Earlier on the prepared comments, you talked about rationalizing SKUs. Can you expand on what category those are concentrated in? Also, with the new merchant in place for a couple of months, is there anything incremental that has been identified that you can share with us as far as changes to your assortment? Thanks.

Susan Lattmann -- Chief Administrative Officer

I'll take the first one. Regarding the rationalization of SKUs, we've looked at all cateogries. There was no category that we excluded. All categories were reviewed for rationalization.

Steven Temares -- Chief Executive Officer

It really is a case of Todd's involvement and his critical eye really came ripping off the band-aid and really taking a look at our assortments in the stores and really trying to say what do we stand for? Do we clearly communicate it to the customer? I think across the board, you can go department by department and find opportunity. Also, you could look at how we show things and doing a better job of aligning our merchandise to the mission trips to really take them out of rooms, to open rooms, to show merchandise to the customers in a more holistic way.

So, again, those are significant opportunities. So, getting Todd's perspective and our merchants' perspective on this and having them act upon it. Part of what we're doing today is an initiative under the name -- I think we might have mentioned it -- going forward, it's called concept strategy. It's something that many people here are working on. It's a daily event.

Operator

This concludes the question and answer session. I'll now turn the call back over to Janet Barth for closing remarks.

Janet Barth -- Vice President, Investor Relations

Thank you, Adrienne. Thank you all for joining us today. We look forward to speaking with you again on January 9th, 2019 when we report our Fiscal 2018 third quarter results. Have a good night.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

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